Over the weekend, trucking company Yellow (NASDAQ:YELL) announced that it would halt operations and lay off its entire workforce of 30,000 employees. The move was spurred by a long-standing battle with Teamsters, a labor union focused toward freight drivers and warehouse workers, as well as due to mismanagement.
Despite the bad news, shares of YELL stock are up more than 300% since Monday’s opening bell. This move higher has been aided by a series of massive purchases from Harvard University-backed hedge fund MFN Partners.
From July 26 to July 28, MFN acquired 7.1 million shares, most of which were purchased for between 57 cents and 65 cents apiece. On July 31, the fund then added another 9.29 million shares at an average price of $1.29 per share. MFN has not publicly provided a reason for its purchases.
Is YELL Stock Setting Up for a Short Squeeze?
For anyone familiar with the trucking industry, Yellow’s demise may have been anticipated. It’s competitors are far more profitable, while Yellow was known to undercut shipping prices. Still, that hasn’t stopped shareholders from bidding up the price in recent days, a trend seen with other meme stocks in the past that carried bankruptcy risk. These include Bed Bath & Beyond (OTCMKTS:BBBYQ) and Tupperware (NYSE:TUP).
Some shareholders may be buying YELL stock due to its high short interest. As of July 15, YELL carried a short interest of 18.9%, up by 15.3% compared to the last reading of 16.4% on June 30. Generally, a short interest of 10% is perceived as high while a short interest of 20% is perceived as very high.
A stock’s cost to borrow (CTB) fee offers another glimpse into the odds of a short squeeze. The CTB is the fee that short sellers must pay to borrow stock and rises when short seller demand is high. As of yesterday, YELL stock had a CTB fee of just 1.49%, which is in-line with the average CTB fee for a stock of between 0.3% and 3%. The metric tallied in at 1.09% as of July 18, which suggests that short interest has been suppressed since then.
At the end of the day, investing in a company with high bankruptcy risk — regardless of its short interest — is seldom a good idea.
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On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
